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IRS Hell for BitCoin Users

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Summary

2018 is the first year U.S. citizens have to file taxes on their cryptocurrency activities for 2017.  The limited “rules” the IRS has published do not cover the majority of types of activities and the information needed to accurately file taxes is simply not available to non programmers and is excruciatingly difficult to acquire, even for programmers.

Tax “Guidance”

In 2014, the IRS published a somewhat vague guidance on how to report cryptocurrency taxes.  It essentially boils down to:

  1. How much did you buy? 
  2. How much did you sell?
  3. What’s the difference?
  4. Send in 30% of your profits.
  5. Determine fair market value on the day of your transactions.

Here’s the actual 2014 IRS tax guidance document.

Reality

Unfortunately, reality is much more complicated than that.  Here are the real-world things that we have no clear rules on:

  1. What if I bought some prior to 2017?
  2. When I sell some, which of the MANY prior purchasing transactions do I apply the price to?  The price is different for every transaction.
  3. What about mining?
  4. What about mining hardware prices?
  5. What about price of electricity?
  6. I bought & sold on more than one exchange.
  7. I moved crypto between exchanges.
  8. I converted crypto from one to another.
  9. Prices at the moment of each transaction are not available when converting between currencies.
  10. Which price would we use, even if we had it?  There’s no universal price on any crypto.  Each exchange has its own, moving price that changes by the second.
  11. What about when a cryptocurrency forks, like BitCoin to BitCoinCASH and BitCoinGold?
  12. They say to use the fair market value of the day to determine prices on transactions, but that’s of no use since the price can swing thousands of dollars within a day.

My Experience

Since 2014, I’ve bought and sold crypto hundreds of times.  On some days, I’ve made dozens of trades in a single day.  In addition to that, I have accounts on 4 exchanges and also mine Ethereum.  I also traded between cryptos like converting BitCoin to LiteCoin and LiteCoin to Ethereum & Ripple & IOTA, etc., and moved crypto between exchanges like CoinBase, Kraken, Bitfinex, & Bittrex, and to and from my personal wallets,  and gained some crypto during forks, and lost some due to CoinBase not giving me my Ethereum Classic.

Over the past week, I’ve spent about 6-10 hours or so JUST on trying to gather what I understood would be needed for my tax accountant for cryptocurrency (not counting my usual taxes).  From the list above, you’ll get a rough idea of what I was going through to try to collect the information.

It’s 2018-03-31 and I finally finished my taxes.  Here’s how the day went:

I was woken up around 9:45 am this morning (I like to sleep late on Saturdays) by my tax accountant.  We spent a SOLID FIVE HOURS on the phone, trying to resolve everything (95% of that was related to cryptocurrencies).  This is their first year dealing with this.  I had to explain a lot about crypto and even the IRS’s rules.  She, apparently, had the same, uninformative PDF document from 2014 from the IRS too and just assumed it’d be as simple as they explain.  Reality is hugely different.

She wanted me to make it simple for her.  I wanted her to make it simple for ME.  That’s kind of why I’m paying her, right?  I spent hours gathering everything she could possibly need (minus the information that was just not feasible to get, but that we actually DO need).

It was simply not enough information, not just the lack of data that I didn’t have access to, but the lack of rules from the IRS.

Conclusion

The amount of effort trying to figure out just HOW to report my cryptocurrency transactions to the IRS was a nightmare and equals about the same amount of effort I spent throughout the year transacting and buying, learning, and setting up my Ethereum mining.  And it was significantly more frustrating than the actual crypto activities.

The IRS needs to get their act together, learn what it is we actually do, and come up with REALISTIC rules that we can actually perform.

After all the time and effort I spent preparing my taxes for my accounted, PLUS the amount of time we spent on the phone afterwords was insane and we STILL didn’t get everything.  We probably got about 85% of what was needed and I guarantee that what we reported was not right, but that was the best we could do.  I had tens of thousands of dollars in transactions.  With the limited information we had, she simply ended up using what I sent to her from the website CoinTracking.com, which is ONLY good for a SINGLE exchange.  So, I reported a $200 profit and paid taxes on that.  At least that is small, to keep my taxes down AND shows a “profit”, which should keep the IRS off my back, since I’m actually paying them something.  I was told that if I reported a loss, it would likely trigger an audit.

What?  Were you hoping to come here for a resolution to YOUR tax problems?  Sorry.  All I can offer is comfort that you’re not alone.  The IRS needs to get their act together and YOU need to click this link to contact your U.S. representative and explain to them the nightmare they’ve created for us.  Click the following link:

Find Your Representative

 

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